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IN THE UNITED STATES DISTRICT COURT
SECURITIES AND EXHANGE COMMISSION,
ONLINE POWER SUPPLY INC.,
COMPLAINT
Plaintiff Securities and Exchange Commission for its complaint alleges as follows: SUMMARY 1. Between June 1996 and May 2000, Kris M. Budinger, the president of OnLine Power Supply, Inc. and Larry G. Arnold, its former chief executive officer sold $17.7 million of OnLine stock through unregistered transactions. In connection with these stock sales, OnLine, Budinger and Arnold, made fraudulent statements or omitted to state material facts to investors concerning, among other things, compensation registered representatives were receiving from OnLine for the sale of its stock and OnLine's financial prospects. 2. In addition, OnLine, aided and abetted by Arnold and Budinger, made filings with the Commission containing misstatements. Arnold and Budinger also caused OnLine to fail to keep accurate books and records. 3. Defendant OnLine Power Supply, Inc. has engaged in, and unless restrained and enjoined by this Court will engage in, transactions, acts, practices, and courses of business that violate Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. §§77e(a), 77e(c) and 77q(a)], Sections 10(b), 13(a) and 13(b)(2)(A) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78j(b), 78m(a) and 78m(b)(2)(A)] and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder [17 C.F.R. §§ 240.10b-5, 240.12b2-20, 240.13a-1 and 240.13a-13]. 4. Defendants Arnold and Budinger have engaged in, and unless restrained and enjoined by this Court will engage in, transactions, acts, practices, and courses of business that violate Sections 5(a), 5(c), and 17(a) of the Securities Act [15 U.S.C. §§77e(a), 77e(c) and 77q(a)], Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5]. Further, Defendants Arnold and Budinger aided and abetted Online's violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act [15 U.S.C. §§ 78m(a) and 78(b)(2)(A)] and Rules 12b-20, 13a-1 and 13a-13 thereunder [17 C.F.R. §§ 240.12b-20, 240.13a-1 and 240.13a-13]. 5. The Commission brings this action pursuant to the authority conferred upon it by Section 20(b) of the Securities Act [15 U.S.C. §77t(b)] and Sections 21(d) and (e) of the Exchange Act [15 U.S.C. §§ 78u(d) and (e)] for an order permanently restraining and enjoining each of the defendants and granting other relief. 6. The Commission seeks an order requiring Defendants Arnold and Budinger to pay civil penalties pursuant to Section 20 of the Securities Act [15 U.S.C. §77t] and Section 21 of the Exchange Act [15 U.S.C. § 78u], barring them from serving as officers and directors pursuant to Section 20(e) of the Securities Act [15 U.S.C. §77t(e)] and Section 21(d)(2) of the Exchange Act [15 U.S.C. § 78u(d)(2)] and barring them from participating in offers of penny stocks pursuant to Section 20(g) of the Securities Act [15 U.S.C. §77t(g)] and Section 21(d)(6) of the Exchange Act [15 U.S.C. § 78u(d)(6)]. JURISDICTION AND VENUE 7. This Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act [15 U.S.C. §77u(a)] and Sections 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(e) and 78aa]. Venue lies in this Court pursuant to Section 22(a) of the Securities Act and Section 27 of the Exchange Act. 8. In connection with the transactions, acts, practices, and courses of business described in this Complaint, each of the defendants, directly and indirectly, has made use of the means or instrumentalities of interstate commerce, of the mails, and/or of the means and instruments of transportation or communication in interstate commerce. 9. Defendant OnLine is located and conducts business in this judicial district. Defendants Arnold and Budinger each reside in this judicial district. In addition, all of the transactions, acts, practices and courses of business constituting the violations of law alleged herein occurred within this judicial district. DEFENDANTS 10. OnLine Power Supply Inc. is a Nevada corporation located in Englewood, Colorado, in the business of developing internal computer power supply devices. In mid-1996, the company, then known as OnLine Entertainment, Inc., merged with Glitch Master Marketing, Inc. a Colorado corporation. In about December 1999 the company changed its name to OnLine Power Supply, Inc. On February 24, 2000, OnLine filed a Form 8-A with the Commission, under which it registered its common stock pursuant to Section 12(g) of the Exchange Act. OnLine's stock is quoted on the Bulletin Board (a quotation service operated by the NASD). 11. Larry G. Arnold, age 57, is a Colorado resident. Arnold was OnLine's chief executive officer, and the chairman of its board of directors, between 1996 and March 2000. He currently is the chief executive officer of Inform Worldwide Holdings, Inc., a publicly held Colorado corporation with stock quoted on the Bulletin Board. 12. Kris M. Budinger, age 49, is a Colorado resident. Budinger was the company's president and chief operating officer, and a member of its board of directors between July 1996 and June 3, 2002, when he resigned from the company. He was its chief executive officer between March 2000 and June 3, 2002. FACTS 13. In mid-1996 OnLine merged with Glitch Master, a Colorado corporation that made a power surge product. Arnold was a shareholder of Glitch Master, and following the merger, became a shareholder and officer of OnLine. At this time, sales of the power surge product were OnLine's only source of revenues. 14. In December 1999, OnLine disclosed that it was developing a power supply device and it did not expect to receive further revenues from the power surge product. I. UNREGISTERED OFFERINGS A. OnLine's Offerings 15. To finance its operations, OnLine raised approximately $17.7 million through nine offerings between 1996 and 2000, which are described below:
16. Arnold and Budinger misappropriated $129,146 of the proceeds from the December 1996 offering. 17. The misappropriated sales proceeds were received by "Billy Jack," a private company that was owned by Arnold but functioned as a joint enterprise of Arnold and Budinger, both of whom received proceeds from its bank account. 18. Arnold and Budinger caused OnLine to file reports, registration statements, and prospectuses with the Commission between December 22, 1999 and May 15, 2000 misrepresenting the 841,000 share transaction as payment for services rendered by a third party. 19. Until resigning from Online Budinger drafted or helped draft the memoranda provided to investors in OnLine's offerings and reviewed and signed all of OnLine's filings with the Commission. 20. Until February 29, 2000, Arnold reviewed the memoranda provided to investors in OnLine's offerings and reviewed and signed all of OnLine's filings with the Commission. 21. OnLine's August 12, 1999, December 12, 1999 and December 20, 1999 offerings were not registered with the Commission. B. Billy Jack Offerings 22. In addition to the offerings of stock by OnLine described above, Arnold and Budinger were involved with several offerings of OnLine stock that were effected through "Billy Jack." 23. The 1,159,000 shares of stock sold through these offerings were owned by investors in Glitch Master, Arnold's company that was acquired by OnLine. 24. At Arnold's suggestion, these shareholders authorized Arnold to sell these shares on their behalf at prices between $.15 and $1.85 per share. Arnold and Budinger then offered to sell the shares to a broker at higher prices, which they did not disclose to the shareholders. Between March 1997 and August 1999, approximately 200 people purchased the shares at prices between $.25 and $2.00 per share, paying a total of approximately $1.1 million to "Billy Jack." 25. Billy Jack paid the owners of the stock, retaining the difference ($743,000) between the lower prices promised to the owners and the prices paid by the purchasers. II. FALSE AND MISLEADING STATEMENTS AND OMISSIONS 26. In selling OnLine stock through both the corporate and Billy Jack offerings, OnLine, Budinger and Arnold each made fraudulent misrepresentations and omissions of material fact. A. By OnLine, Arnold and Budinger Compensation of Brokers 27. Memoranda provided to investors in seven of the OnLine offerings stated that OnLine would pay a broker a commission equal to 10% of the proceeds raised in the offerings. 28. Despite these statements, Online, in addition to the 10% commission, as undisclosed compensation, allowed brokers to use their commissions to buy stock at a discounted price of $.45 per share from the company. 29. Footnotes to OnLine's financial statements contained in registration statements, prospectuses, and annual and quarterly reports filed with the Commission between December 22, 1999 and March 30, 2001 stated that OnLine made payments representing a 10% commission to certain unidentified brokers, or that certain stock issuances relating to private offerings were "for sales commissions," thereby suggesting that these issuances were in lieu of cash. 30. These statements were misleading because they did not disclose the additional compensation given to brokers by allowing them to purchase stock from OnLine at $.45 per share. 31. Arnold and Budinger knew about the undisclosed compensation agreement. Use of Proceeds 32. On March 2, 1999, while the October 12, 1998 offering was ongoing, the retirement account for a broker-dealer loaned OnLine $88,000 for operating expenses. The loan was repaid on May 27, 1999 with proceeds from the offering with interest at an 18% annual percentage rate. 33. The memorandum used in that offering stated that proceeds would be used for working capital, marketing, manufacturing and distribution, and other related purposes. 34. These statements were misleading because they did not disclose repayment of the loan. 35. Arnold, Budinger and OnLine knew about the loan to OnLine and, therefore, knew that statements about the use of proceeds in the offering memorandum were incomplete and misleading. Financial Projections 36. The private placement memoranda used in the August 12, 1999 offering stated that OnLine anticipated earning $2.29 per share by the end of 2000 and also predicted that, assuming that 40% of the requests from potential customers for specifications received resulted in contracts, OnLine would achieve revenues of $4.8 million in 1999, $44.9 million in 2000, and $229 million in 2001. 37. The projections in the memoranda were purportedly discounted 60% from even higher projections that were prepared by an OnLine consultant. 38. The projections in the offering memoranda lacked a reasonable basis because the 60% discount from the consultant's projections and the 40% discount from requests for specifications were arbitrary, and Arnold and Budinger believed that the consultant's projections themselves were excessive and unreliable. 39. In addition, Arnold and Budinger knew that the financial projections were not supported by OnLine's operations or financial condition. B. By OnLine and Arnold Financial Projections 40. On December 1, 1998, OnLine's public relations firm issued a press release quoting Arnold as stating that a recent trade show would "generate over $60 million in new business" for OnLine. 41. Arnold reviewed the press release before it was disseminated. 42. After the press release was issued, the closing price of OnLine stock increased by 30% from $2.31 to $3.00 per share, and reported volume increased by 629% from 15,400 to 112,300 shares. 43. Arnold repeated the $60 million figure to a reporter from the Associated Press, who included the projection in a March 17, 1999 article. 44. Between approximately January 1999 and March 2000, a promotional report was posted on an Internet website, predicting that, based in part on OnLine's sale of power supply products, the company would realize sales of between $23.7 and $267 million between 1999 and 2001. 45. Arnold was the source of this information. 46. These projections lacked a reasonable basis because they were unsupported by OnLine's operations. OnLine was winding down sales of the "Glitchmaster", its sole source of revenues and had no other product in commercial production. The projections also were inconsistent with OnLine's historical financial performance as reported in offering memoranda. OnLine had revenues of $50,000 and a $316,400 net loss for the six months ended June 30, 1997. OnLine reported sales of $262,964 and a $1,449,530 net loss in 1998, sales of $299,408 and a $1,588,355 net loss for 1999. Orders for OnLine Products 47. In mid-February 2000 Arnold told an investor that the company would soon receive orders worth between $60 and $500 million. The investor posted messages containing this information on an Internet message board. 48. After a message was posted on the Internet on February 18, 2000 the closing price of OnLine stock increased by 18% from $23 to $27.25 per share, and reported volume increased by 172% from 79,900 to 217,400 shares. 49. Arnold's statement was false or misleading. At the time the statement was made, OnLine had received only preliminary requests for specifications from potential customers. In fact, on February 29, 2000, OnLine filed a Form 8-K with the Commission stating that it had not signed any contracts for its power supply products, and to date had received only "small orders for the product for evaluation purposes." C. By Arnold and Budinger 50. Arnold and Budinger sold 841,000 shares of OnLine stock issued by OnLine to purchasers, wrongfully keeping the majority of the proceeds for themselves. 51. Proceeds from this offering were deposited into the Billy Jack bank account. OnLine received $81,104 in proceeds from the account. Arnold and Budinger received the balance of the sales proceeds ($129,146). 52. In its 1998 financial statements, OnLine valued the shares at $.78 per share, or $402,936. 53. OnLine's financial statements contained in its annual reports, registration statements and prospectuses filed between December 22, 1999 and May 15, 2000, as well as memoranda used in some of the corporate offerings, which were all prepared, reviewed or signed by Arnold and Budinger, stated that certain shares issued from OnLine's treasury, including the 841,000 shares, were issued as broker commissions relating to the private offerings. 54. These statements were false, since the 841,000 shares were issued for the benefit of Arnold and Budinger, who misappropriated proceeds from the sale of these shares. 55. Arnold and Budinger knew that the statements in OnLine's offering memoranda and Commission filings about the purpose of the issuance of these shares were false since they had misappropriated most of the proceeds of the sale of stock. III. REPORTING VIOLATIONS 56. OnLine's annual and quarterly reports contained material misrepresentations concerning the use of the 841,000 shares of OnLine treasury stock, and the compensation of brokers who sold OnLine stock. 57. By filing annual reports containing materially false and misleading statements and omissions, OnLine violated the reporting provisions of the securities laws. 58. By drafting and/or reviewing or approving these reports, Arnold and Budinger aided and abetted OnLine's reporting violations. IV. BOOKS AND RECORDS VIOLATIONS 59. OnLine failed to develop and maintain accounting records that accurately reflect financial information. 60. OnLine's books and records falsely indicated that the issuance of the 841,000 shares was to compensate brokers in connection with corporate offerings of its stock, when in fact this issuance was for Arnold's and Budinger's benefit. 61. As OnLine's directors and/or officers responsible for its day-to-day activities and financial affairs, Budinger and Arnold aided and abetted OnLine's books and records violations. FIRST CLAIM FOR RELIEF (Violations by Online, Arnold and Budinger of Section 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e(c)] 62. Paragraphs 1 through 61 are hereby realleged and incorporated by reference. 63. Defendants OnLine, Arnold and Budinger, while no registration statement was in effect, directly and indirectly, made use of means or instruments of communication in interstate commerce or of the mails to sell OnLine securities and carried or cause to be carried OnLine securities through the mails or in interstate commerce for the purpose of sale or delivery after sale. 64. Defendants OnLine, Arnold and Budinger directly or indirectly made use of the means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell OnLine securities when no registration statement had been filed. 65. By reason of the foregoing, defendants OnLine, Arnold and Budinger violated and unless restrained and enjoined will violate Sections 5(a) and 5(c) of the Securities Act. SECOND CLAIM FOR RELIEF (Violations by OnLine, Arnold and Budinger of Section 17(a)(1) of the Securities Act [15 U.S.C. § 77q(a)(1)]) 66. Paragraphs 1 through 61 are hereby realleged and incorporated by reference. 67. Defendants OnLine, Arnold and Budinger directly and indirectly, with scienter, in the offer or sale of OnLine securities, by use of the means or instruments of transportation or communication in interstate commerce or by use of the mails, have employed a device, scheme, or artifice to defraud. 68. By reason of the foregoing, defendants OnLine, Arnold and Budinger violated and unless restrained and enjoined will violate Section 17(a)(1) of the Securities Act. THIRD CLAIM FOR RELIEF (Violations by OnLine, Arnold and Budinger of Section 17(a)(2) and 17(a)(3) of the Securities Act [15 U.S.C. § 77q(a)(2) and (3)]) 69. Paragraphs 1 through 61 are hereby realleged and incorporated by reference. 70. Defendants OnLine, Arnold and Budinger directly and indirectly, in the offer or sale of OnLine securities, by use of the means or instruments of transportation or communication in interstate commerce or by use of the mails, have obtained money or property by means of untrue statements of material fact or omissions to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or engaged in transactions, practices, or courses of business which have been or are operating as a fraud or deceit upon the purchasers of OnLine securities. 71. By reason of the foregoing, defendants OnLine, Arnold and Budinger violated and unless restrained and enjoined will violate Section 17(a)(2) and (3) of the Securities. FOURTH CLAIM FOR RELIEF (Violations by OnLine, Arnold and Budinger of Section 10(b) of the Exchange Act and Rule 10b-5 [15 U.S.C. § 78 j(b) and 17 C.F.R. § 240.10b-5]) 72. Paragraphs 1 through 61 are hereby realleged and incorporated by reference. 73. Defendants OnLine and Arnold and Budinger directly and indirectly, with scienter, in connection with the purchase or sale of OnLine securities, by use of the means or instrumentalities of interstate commerce or by use of the mails, have employed devices, schemes, or artifices to defraud; have made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or have engaged in acts, practices, or courses of business which have been and are operating as a fraud or deceit upon the purchasers or sellers of such securities. 74. By reason of the foregoing, OnLine and Arnold and Budinger violated and unless restrained and enjoined will violate Section 10(b) of the Exchange Act and Rule 10b-5. FIFTH CLAIM FOR RELIEF (Violations by OnLine of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 [15 U.S.C. § 78m(a) and 17 C.F.R. §§ 240.12b-20, 240.13a-1, and 13a-13]) 75. Plaintiff repeats and realleges paragraphs 1 through 61 above. 76. OnLine filed materially misleading annual and quarterly reports with the Commission. 77. By reason of the foregoing, OnLine violated and unless restrained and enjoined will violate Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. SIXTH CLAIM FOR RELIEF (Aiding and Abetting by Arnold and Budinger of OnLine's Violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13) 78. Plaintiff repeats and realleges paragraphs 1 through 61 and paragraphs 76 and 77 above. 79. Arnold and Budinger knew of OnLine's violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder and substantially assisted OnLine in committing these violations. 80. By reason of the foregoing, Arnold and Budinger aided and abetted OnLine's violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder, and unless restrained and enjoined will continue to aid and abet violations of these provisions. SEVENTH CLAIM FOR RELIEF (Violations by OnLine of Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)]) 81. Plaintiff repeats and realleges paragraphs 1 through 61 above. 82. OnLine failed to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflected the company's transactions and dispositions of its assets. 83. By reason of the foregoing, OnLine violated and unless restrained and enjoined will violate Section 13(b)(2)(A) of the Exchange Act. EIGHTH CLAIM FOR RELIEF (Aiding and Abetting by Arnold and Budinger of OnLine's Violations of Section 13(b)(2)(A) of the Exchange Act) 84. Plaintiff repeats and realleges paragraphs 1 through 61 and paragraphs 82 and 83 above. 85. Arnold and Budinger knew of OnLine's violations of Section 13(b)(2) of the Exchange Act and substantially assisted OnLine in committing these violations. 86. By reason of the foregoing, Arnold and Budinger aided and abetted OnLine's violations of Section 13(b)(2) of the Exchange Act, and unless restrained and enjoined will continue to aid and abet violations of these provisions. PRAYER FOR RELIEF WHEREFORE, the Commission respectfully requests that the Court: I. Find that the Defendants, and each of them, committed the violations alleged. II. Enter an Injunction, in a form consistent with Rule 65(d) of the Federal Rules of Civil Procedure, permanently restraining and enjoining each Defendant, their subsidiaries, officers, directors, agents, servants, employees, and attorneys-in-fact, and all persons in active concert or participation with them, from violating, directly or indirectly, the provisions of law and rules alleged in this complaint. III. Order Arnold and Budinger and their agents, servants, employees and attorneys to account for and disgorge all ill-gotten gains received or benefits in any form derived from the illegal conduct alleged in this Complaint, together with pre-judgment and post-judgment interest as provided by law. IV. Order Arnold and Budinger to pay civil penalties pursuant to Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act in an amount to be determined by the Court. V. Enter an Order barring defendants Arnold and Budinger from serving as officers or directors of any publicly held company pursuant to Section 20(e) of the Securities Act and Section 21(d)(2) of the Exchange Act. VI. Enter an Order barring defendant Arnold and Budinger from participating in any offering of a penny stock pursuant to Section 20(g) of the Securities Act and Section 21(d)(6) of the Exchange Act. VII. Grant such other relief as this Court may deem just or appropriate. Dated: January 21, 2003 Respectfully submitted, ___________________________
Footnotes1 The Commission is not alleging that the proposed defendants committed securities laws violations in connection with the October 1996 offering.http://www.sec.gov/litigation/complaints/comp17943.htm
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